NUA (Net Unrealized Appreciation) in Holistiplan

This article breaks down the basics of NUA and how to enter it in our Scenario Analysis page.

Normally, any distributions from a 401(k) are taxable as ordinary income. In certain cases; however, employees are allowed to move employer stock from a 401(k) into a taxable brokerage account when they leave that employer. The difference between the cost basis of the shares and the market price is referred to as Net Unrealized Appreciation (NUA), and this amount isn't subject to income tax upon transfer. If done right, you can sell the shares and pay long-term capital gains rates, which are much lower than the rates on ordinary income.

But this doesn't mean the distribution of the employer stock is tax free: the taxpayer still needs to pay income tax on the cost basis of the shares, which you'll want to include in any projections.


How Can This Be Reported in Scenario Analysis?

The basis of the shares (which is what gets reported in dollar amounts) will be placed in the "IRA Distribution Field". Click the pencil icon located next to the entry field in the column you are working on to bring up the "IRA Distribution Worksheet."




Enter the basis of the shares in dollars into the "Taxable IRA Distributions" field for the appropriate taxpayer on the return. You will NOT want to use the Override data entry box as you will want to be taxpayer specific when considering the NUA type event. 

If client is under 59.5 years of age, the basis of the shares may not be subject to the 10% early withdrawal penalty, provided that the triggering event for NUA is separation from service and the client is at least age 55 when they leave their employer. Otherwise, the 10% early withdrawal penalty will apply. 



The distributed basis from the NUA will be taxed as ordinary income, and should be reflected as "IRA Distributions" in the "1040 Income" section in the year of distribution. Future sales of that NUA portion are taxed as capital gains and entered in the "Schedule D Income" section.

In addition, the NUA gain is also not subject to the 3.8% Medicare surtax on net investment income. Therefore, when entering the sale of the NUA shares within Schedule D, you will also want to include these gains as not subject to the NIIT on Form 8960 of Scenario Analysis using the Line 5b data entry box; in accordance with the directions for Form 8960 from the IRS found here, you will want to consider entering any gains as a negative value and any losses as a positive value. 

 

For more information on NUA, you may also find this Kitces article helpful: Net Unrealized Appreciation (NUA)